8 Types of Restaurant Fraud and How to Prevent Them

In restaurants, fraud is quite common. Why? Large staffs with multiple people who have access to systems and registers, combined with multiple shifts and high employee turnover, the owner can’t be there every second of the day to prevent restaurant fraud.

In this article we’ll cover:

 

External restaurant fraud vs. internal restaurant fraud

External fraud is committed by customers, vendors, suppliers or anyone else who isn’t directly employed by your restaurant. Employees are responsible for internal fraud. Internal fraud is the most common type of business fraud, across all industries. According to the National Restaurant Association, this is approximately 80% of all fraud in business. 75% percent of all restaurant losses are due to theft by employees. 

 

There are three types of fraud committed in restaurants.

1. Chargebacks

What is chargeback?

When a customer contests a charge made on their debit or credit card, a chargeback occurs. The chargeback will refund the charge. Merchant error, criminal fraud, and friendly fraud are all examples of chargeback fraud. 

• Fraud committed in criminal proceedings This is exactly what it says. When fraudulent credit cards are used, or a guest pays for your restaurant’s services and disputes the refund request. 
• Merchant errorsThese are the most common chargebacks. For example, guests may complain that the meal they received was poor and request a refund. However, this is even though the guest did not request a refund and had never notified their server about the problem. Although the merchant may refund the money, the reasoning could be fraudulent.
• Friendly fraud The chargeback is initiated by the customer. Unintentional friendly fraud occurs when a customer authorizes a purchase, but then files a chargeback and doesn’t realize they are responsible. For example, a child may be verbally authorized to use their parent’s credit card. When the bill arrives, the parent may dispute the charge, assuming it’s fraud.

Stop chargeback fraud

• Following the instructions of your processor. Card-present purchase: Make sure the card’s validity has not expired. Also, make sure to enter the card security code if it is applicable. Keep your systems up-to-date, such as Technology with EMVTo avoid being held liable for any chargeback.
• Encourage employees to be aware of the signs and symptoms of fraud. Customers who attempt to pay with multiple credit cards should be verified and signed. The activity could be fraudulent if many transactions are declined.
• Use clearer payment descriptors on your end. If your restaurant’s name is Holly’s Cafe use a descriptor that your customers will recognize on their credit card statements, such as “Hollys-Cafe-Restaurant,” rather than the name of a parent company or bank.
• Rapidly resolve customer service concerns You can reach customers quickly if they express dissatisfaction.

2. Vendor fraud

Is vendor fraud real?

• Billing schemesThe vendor fraud umbrella includes fraud involving check tampering, bribery, or extortion. False documentation used by employees to create bills is called a billing scheme. False payment to their benefit. 
• Check tamperingThis is where checks are altered to be deposited in an unintended account. This could include altering the payee’s information or forgery. 
• Extortion and BriberyThis happens when an employee receives inappropriate payments from a vendor. 

What to do about vendor fraud

• Segmentation of duties Clear divisions should exist between employees who receive the goods and those responsible for processing the invoices or payments. 
• Control third party access Third-party vendors such as payroll should only be granted the necessary access. It prevents security breaches as well as ensures your employees’ security.

3. Robbery and break-ins

RobberyThis is where a victim is present, and is robbed by force or intimidation of valuables. Most burglaries and break-ins are carried out without the victim being present. For example, a restaurant is robbed during or after business hours.

How to prevent robbery and break-ins

• Use a monitored alarm system & surveillance camera. Silent alarm systems You can contact police and ask for help without worrying about the robbers. This will allow you to recover stolen items or money. 
• Nightly empty cash drawers You can get by with less money the more unattended cash is left in a restaurant.
• Modify your routines. You shouldn’t do the exact same thing each morning and every night. It is possible that someone may come to your restaurant looking for future burglary opportunities and learn your most vulnerable times. Make sure to use the Buddy system—open and close with two employees together to provide more security than a solo open.

 

There are 6 kinds of internal fraud that can be committed in restaurants

1. Scams involving auto-gratuity

Are there auto-gratuity scams to avoid?

Auto-gratuityThis is where a restaurant adds gratuity to the bill. The auto-gratuity, which is usually 18% of the total bill, is applied only to groups of six or less. This policy is usually printed on the restaurant’s menu. 

Scams involving auto-gratuityThis happens when employees take advantage of customers and allow them to tip more.

How to prevent auto-gratuity scams

Employees who leave more than average tips are worth looking for. If you have a bill that includes a Large tip plus a regular service fee, it is possible the customer wasn’t made aware of automatic gratuity and left an additional cash tip.

2. Transactions wrongly canceled

What is wrongly voided transaction?

voidThis is a transaction that cancels, completely or all of a completed transaction. 

Transactions wrongly canceledWhen a server charges the customer for their entire order but then voids specific items or pockets the money, this is called a “service charge”. Your insights restaurant POSYou can easily compare the voids/comps for each server to keep track of these costs. 

Stop wrongly cancelled transactions

• Compare average voids across a time frame. The employee suspected of causing suspicion is the one with the highest average number of employee voids. You can then identify and hold the culprit employee accountable.
• Check time stamps on void. Employers can take advantage of the fact that fewer workers are on shift during the late night and early morning hours. Transactions can be fraudulently null.The time stamps can be used to distinguish between voids that occur during regular hours and those that do not.

3. Scams of undercharging

How do you define undercharging?

When an employee charges more for a product and then rings the POS to charge it as a lower price, this is called undercharging. For example, a bartender may take a customer’s order for a $15 glass of wine. The bartender then rings it into the restaurant’s POS as an $8 glass of wine, pocketing the $7 difference. 

How to prevent undercharging scams

• Keep an eye on inventory. This scam is popular because it can’t be detected on most restaurant POS systems and flies under the radar unless inventory is consistently checked. Automize inventory using automatic inventory software  which ensures that what is being rung into the POS is what’s being served to customers.

4. Time theft

Time theft: What does it mean?

Time theftThis can come in many ways: extra breaks for employees, too-early clocking, and too-late clocking out. Poor employee engagement, paper timesheets and inefficient scheduling are the results of poorly designed timesheets.These are all factors that can encourage time theft by employees in your restaurant. 

Time theft: How can you stop it

Effective scheduling. Scheduling software allows you to set up shifts for employees, create scheduling schedules, and even enforce punch-in rules in your restaurant.

5. Food theft

How do you define food theft?

Food theftThis is where employees take home food without permission, eat outside of the allocated shift meals or give meals to friends.

How can you stop food theft

• All sales and inventories can be tracked. Whether it’s as simple as sneaking an additional snack without permission or a more serious issue like stealing a crate of food right off a delivery truck, these thefts are costly in the long run.
• Restriction of alcohol access Alcohol can represent some of the more expensive items on a restaurant’s menu, such as a fine wine or aged liquor. Keep a running inventory of alcohol and limit access to it to employees like bartenders, general managers and other supervisors to reduce theft.

6. Intellectual property theft

Is intellectual property theft a crime?

All types of trade secrets include customer and vendor lists as well as recipes. It includes recipes, formulas and patterns as well as programs, protocols, devices, methods, and procedures for creating menu items. Intellectual property theft, which is often neglected, can be a major contributor to fraud in restaurants. 

How to stop Intellectual Property Theft

• Patents. Machines, manufactured items, and chemical compositions can all be patentable. An Italian restaurant may have the owner’s grandmother come in and cook the pasta sauce from scratch, alone, without a recipe written down. This makes the sauce a valuable trade secret—it is something you’ve gone out of your way to protect.
• Copyrights. A restaurant’s menu design, website and promotional marketing materials all fall under protected copyright law. These can be a restaurant’s long-term, secret competitive advantage over the competition, so copyright law is important to consider.

It is expensive enough to open a restaurant without having to worry about fraud. You can use the many software programs available to assist restaurant owners in identifying areas where fraud could occur. It will ensure that you don’t lose money but make it.

Are you looking for technology partners to assist with inventory management, personnel, operations, and other tasks? To learn more, chat with one our experts How Small Biz Sense Can Help.